When J.J. Berney began talking to Chicago-based Citadel Investment Group about the possibility of taking an analyst position with the hedge fund giant in 2002, he had some major convincing to do. Six years as an equity analyst at Goldman, Sachs & Co. seemingly would have made him a shoo-in for the job, but he found that was not necessarily the case, as his interviewers questioned how he would translate his Wall Street coverage of the Media category into profitable picks.
“In general, hedge funds have been very circumspect of sell-siders making the jump to the buy side,” says Berney, who this May will celebrate his sixth anniversary with Citadel and understands his employer’s initial apprehension. “It can be a difficult transition, and the track record of those who have made the jump has been mixed.”
Being an analyst at a hedge fund requires a set of skills more akin to those of traders and portfolio managers than to those of traditional Wall Street equity analysts. Generating moneymaking ideas is paramount, as good stock picking is often the difference between a firm’s success and failure. Profitable picks can translate into massive bonuses, seven-figure compensation packages and even the promise of ultimately running one’s own hedge fund firm. Poor picks, however, can make for a short-lived career. Not surprisingly, hedge fund analysts describe their jobs as extremely intense and stressful, and say turnover is much higher than on the sell side. But with the potential for such lucrative payouts, their positions are in huge demand.
“The pressure at hedge funds is substantially higher,” says one top-ranked hedge fund analyst who spent several years on Wall Street and who asked to remain anonymous. “Your longer-term thematic ideas are still relevant, but they need to be put in the context of what a holding and a short is going to do in the next week, month and sometimes even day — depending on the horizon of the fund you’re at. High-performing funds don’t tolerate poor performance.”
To identify the individuals who shine as hedge fund analysts, Alpha turned to the people outside their firms who know them the best — their sell-side counterparts. Throughout the fall we asked sell-side analysts who received votes in the 2007 All-America Research Team survey conducted by Institutional Investor, our sister publication, to name the most impressive hedge fund analysts in nine industry categories, from Basic Materials to Telecommunications. The results, which make up our inaugural Top Hedge Fund Analysts ranking, highlight the top vote-getters in each category, based on feedback from more than 420 sell-side analysts at more than 80 firms.
Stamford, Connecticut–based SAC Capital Advisors leads the ranking. Analysts at SAC are considered best in Basic Materials, Consumer, Health Care and Telecommunications; in Capital Goods/Industrials, members of SAC’s research team nab both the No. 1 and No. 3 positions for the category. Citadel analysts are also popular among sell-side voters, helping the firm finish second overall. Citadel analysts take first place in Financial Institutions (a sector where the firm also lands the No. 2 position) and Technology, along with top-three rankings in Capital Goods/Industrials, Consumer and Media. New York–based Galleon Group comes in third overall, as four of the firm’s analysts rank in three sectors — Energy, Health Care andTechnology.
At investment banks, covering many of these sectors often means the need to forsake in-depth coverage of individual stocks in favor of more general, longer-term industry perspectives. But at hedge funds analysts are usually given free rein, with the expectation that they will make such freedom pay off.
“One of the interesting things about being at a hedge fund is that if you can’t make money in a particular sector, then you don’t follow it,” says Andrew Slabin, who works in the New York office of London-based GLG Partners and is No. 1 in Media. “The goal is to be as profitable as possible.” Since joining GLG in 2004, Slabin says he has been able to focus more on the short-term prospects of individual stocks than he could in his previous role as an equity analyst for Merrill Lynch, adding that sell-side analysts can spend months researching the health of a specific sector without ever picking a single stock in their final reports.
Having success at a hedge fund is all about the bottom line. “This industry is driven by performance and our ability to generate returns for the firm and for investors,” says Matthew Simon, a Capital Goods/Industrials analyst for Citadel who ranks second in the sector. Simon, who began his career as a junior analyst at Salomon Smith Barney, joined Citadel in 2004 from Chicago-based private equity firm Madison Dearborn Partners, where he covered Media and Telecommunications.
When hedge fund analysts prove their ability to generate moneymaking stock picks, the rewards can be sizable. For example, the median annual compensation for a senior analyst with less than five years’ experience at a hedge fund firm was $811,510 in 2006, according to the findings of the 2007 Alpha Hedge Fund Compensation Report, which surveyed more than 800 employees at roughly 600 hedge fund firms in 30 countries (Alpha, April 2007). Comparatively, the CFA Institute’s 2007 Member Compensation Survey found that the median annual compensation for sell-side equity analysts with less than five years’ experience was $195,000 in 2006.
Three main factors determine compensation at hedge funds: assets under management, investment performance and a formula for sharing profits. Individual analyst compensation is often determined by the partners and senior management of a firm, but many bigger firms, such as $9 billion Greenwich, Connecticut–based Lone Pine Capital, rely on a combination of individual contributions and a fund’s overall performance.
“Analysts at a lot of hedge funds are effectively acting as portfolio managers; the day-to-day job is very much coming up with investment ideas,” says Maureen Brille, a managing director at Gerson Group, a New York–based executive search firm that works with hedge funds. The difficulty in finding analysts who can succeed at hedge funds, she adds, is another reason firms are willing to pay so handsomely. To do well, Brille says, individuals must be nimble, well rounded, insightful and interested in the markets, and have good gut instincts. “Judgment is the most important thing, and it’s the hardest thing to try to test for,” she explains.
For Chicago-based UBS O’Connor’s Paul Chambers, the ability to identify short-selling opportunities, a staple of hedge funds, is a major contributor to his No. 1 standing in Energy. Among his impressive 2007 calls, Chambers shorted New Orleans–based Tidewater — a company that supplies support services and vessels to the offshore energy industry for exploration, development and production — in July. At the time, Tidewater was trading in the $75 to $80 range. By November its shares had fallen below $50, as the company’s profits for the quarter ended June 30 fell short of analyst estimates because of higher-than-expected maintenance costs.
Hedge fund analysts’ tendencies to focus on individual stocks do not preclude big-picture analysis of the markets and specific industries. To strengthen their own market coverage, many hedge fund analysts rely on relationships with their sell-side peers and often contribute their own ideas on the sectors they cover, to foster the ongoing exchange of information.
“I try to partner with the sell side in a give-and-take relationship,” says Citadel’s Jim Hoeg, No. 3 in Consumer. Adds his colleague Simon, “I learn a lot from bouncing ideas off people, and if they like what you have to say and what you think, it encourages more dialogue.”
For Berney, No. 2 in Media, making a successful transition to hedge funds from the sell side first meant convincing Citadel of his keen sense of entrepreneurship and willingness to take smart risks and then proving his claims by delivering strong, profitable stock picks. “On the sell side I evaluated companies more than I evaluated stocks,” he says, noting that many of the sell side’s top analysts can’t pick stocks. “But on the buy side, the most important trait we need to have is to be good stock pickers. That’s how we generate returns.”
Daniel Johnson • Citadel Investment Group
Financial Institutions
Daniel Johnson likes to win. And as a sharpshooter, both in and outside the office, he wins often. Sell-side analysts describe Johnson’s focus on the insurance industry as laser-sharp. “He’s like a sponge for all things related to what he’s focused on,” says one voter.
These days, Johnson is concentrating on spotting opportunities in an industry plagued by declining premiums and a stressed credit market — two factors he expects will remain ongoing for the foreseeable future. “There are always opportunities that emerge when the market bids all companies in a sector up or down equally,” says Johnson, 39. “In these situations, good returns come from owning reasonably priced companies with quality management, good distribution and strong balance sheets.”
Johnson began covering health care for Chicago-based venture capital firm Brinson Partners in 1996, following the completion of his MBA at the University of Chicago, and transitioned to insurance in 1999. In 2004, attracted by the prospects at hedge funds, he moved a few blocks down the street to Citadel Investment Group, where he continues to follow the insurance industry.
“Being successful here is not just about the bottom line; there’s more to it,” says Johnson, who spends his days looking for investment opportunities others have overlooked. “To find out what the market’s missed takes effort and a time commitment,” he adds.
His efforts are paying off. Beyond his strong investment track record, the depth of Johnson’s knowledge of the insurance industry and his willingness to share his insights with the Street impress sell-side analysts. Those who know him outside the office are also quick to note that he is a crack shot with a gun — a hobby he picked up as a boy growing up in the Midwest that he is now passing on to his own sons.
Andrew Slabin • GLG Partners
Media
Andrew Slabin took the road less traveled, and that really has made all the difference. When Slabin graduated from the University of Vermont in 1993 with an undergraduate degree in finance, most college graduates interested in financial services were joining investment banks. But instead of following the pack, Slabin took a junior analyst post at Boston’s John Hancock Funds, where he covered Media and Entertainment.
“It was really interesting to see how people invest, and Boston was a great place to be in the early 1990s,” says Slabin, 37. Five years later he was given the opportunity to learn the sell side of the business as a junior analyst working with longtime Institutional Investor–ranked first-team analyst Jessica Reif Cohen at Merrill Lynch. “I was a jack-of-all-trades, master of none,” says Slabin. The connections he amassed at Merrill and his intricate knowledge of the industry are a huge part of the reason GLG Partners was interested in him. He jumped at the opportunity to return to the buy side for a position in the London-based firm’s New York office.
Slabin, who works on GLG’s North American Opportunities Fund, is described by his sell-side counterparts as “an excellent example of what the best of the buy side should be.” In particular, sell-siders point to his strong interviewing skills and his willingness to work with analysts on both the buy side and the sell side. In recent months he has taken a fairly bearish approach to the Media category — a sentiment he is unlikely to change in the foreseeable future, in light of the impact the three-month writers’ strike in Hollywood and fears of a recession have had on the industry. Two stocks he does like are Minneapolis’s Dolan Media Co., which has benefited from the rise in newspaper advertising of foreclosures, and Centennial, Colorado–based National CineMedia, which dominates movie screen advertising.
Ted Orenstein • SAC Capital Advisors
Capital Goods/Industrials
Ted Orenstein goes against the grain — a quality that not only helps him identify investment opportunities others often miss but that has earned him respect among sell-siders and sets him apart from other hedge fund analysts.
“He has a nose for the nonconsensus view of stocks,” says one sell-side analyst, adding that Orenstein has a high regard for his investment bank counterparts.
Before his 2003 arrival at Stamford, Connecticut–based SAC Capital Advisors — where he is responsible for tracking a group of roughly 200 primarily U.S.-based multi-industry conglomerates — Orenstein spent seven years at Boston-based Fidelity Investments. During his time there he worked as an analyst and eventually a portfolio manager, heading up the firm’s then $17.7 million Fidelity Select Industrial Equipment Portfolio until his decision to move into the hedge fund industry.
Orenstein, 36, who holds an MBA from the University of Pennsylvania’s Wharton School, is described by sell-side analysts as unemotional and egoless in his investment approach.
But his stock-picking skills and ability to identify unique opportunities, sell-siders say, ultimately separate him from other hedge fund analysts covering Capital Goods/Industrials.
“He has one of the best success records of any hedge fund industrials analyst I know,” says one sell-side analyst, noting that in past turbulent markets Orenstein has often turned to steadier European markets for investment opportunities.
Top Hedge Fund Analysts
As part of the Top Hedge Fund Analysts survey, we asked sell-side analysts to identify the hedge fund industry’s best analysts in nine major sectors. Here they are.
Basic Materials
Andrew Schwartz SAC Capital Advisors
Capital Goods/Industrials
Ted Orenstein SAC Capital Advisors
Second place Matthew Simon Citadel Investment Group
Third place Nathan Miller SAC Capital Advisors
Consumer
David Lichtman SAC Capital Advisors
Second place William Maffie Adage Capital Mgmt
Third place Jim Hoeg Citadel Investment Group
Energy
Paul Chambers UBS O’Connor
Second place Peter McNally Galleon Group
Third place James Mooney Decade Capital
Financial Institutions
Daniel Johnson Citadel Investment Group
Second place Thomas Stephens Citadel Investment Group
Third place Anil Stevens Balyasny Asset Mgmt
Health Care
Jonathan Siegel SAC Capital Advisors
Andrew Weinberger Galleon Group
Third place Daniel Wichman Galleon Group
Media
Andrew Slabin GLG Partners
Second place J.J. Berney Citadel Investment Group
Third place Larry Petrella Diamondback Capital Mgmt
Technology
Kevin Merritt Citadel Investment Group
Second place Murali Abburi Galleon Group
Third place Dris Upitis Viking Global Investors
Telecommunications
Craig Mallitz SAC Capital Advisors
